So many exploration and production special-purpose acquisition companies (SPACs) is troubling; What you want to see less of are the so-called deal-maker types

Tuesday June 25, 2013

So many exploration and production special-purpose acquisition companies is troubling

Raison D’etre – By Risen Jayaseelan

THAT there are so many exploration and production (E&P) special-purpose acquisition companies, or SPACs, is troubling me. Aren’t there other businesses that can fit into a SPAC model? One would almost think that only E&P concepts are allowed to float as SPACs.

That, of course, is absolutely not true. You can put together a SPAC doing just about anything that would eventually make money in a business you are supposedly an expert in.

I could bring together a bunch of senior newspaper folk and launch a SPAC to raise funds to buy ailing newspapers with the aim of consolidating and turning around those businesses. But then, who’s going to give me the millions of ringgit that I need? Are they going to trust me with that kind of money?

Hence, it is commendable that the two listed SPACs have raised a total of some RM600mil.

And now, you have Sona Petroleum Bhd looking to break that record with a RM550mil initial public offering (IPO). Sona has just had its IPO underwritten.

At Sona Petroleum’s underwriting ceremony. From left: Kenanga Investment Bank group MD Chay Wai Leong, RHB Investment the late Tan Sri Yahaya Ahmad of Bank officer-in-charge Mike Chan, Hadian, CIMB Investment Bank CEO Datuk Charon Wardini Mokhzani and MIDF Amanah Investment Bank corporate investment banking head Jeyaratnam Tamotharam Plllai. Sona Petroleum Bhd, the latest special-purpose acquisition company (SPAC) to be approved for listing, is poised to hit a record-breaking RM550mil in initial public offering (IPO) proceeds for a SPAC, having just inked an underwriting agreement with four local banks. Asked if the management was confident of hitting the ambitious fund-raising target, managing director Datuk Seri Hadian Hashim said: “Yes, the first two investors have given us that level of confidence. The response has been good.”

Still, it’s going to be a challenge to raise that kind of money. Investors, though, must like what they see in the share price performance of the two listed SPACs, Hibiscus Petroleum Bhd and CLIQ Energy Bhd (all three SPACs are in the E&P space).

Still, they ought to know the market risks involved in these SPACs there is always the possibility that the assets that these SPACs acquire fail to produce the financial returns that they expect, resulting in the end of the road for that SPAC.

And like in all SPACs (or all types of investments for that matter), investors need to figure out the risk-return profile of the SPAC.

The other obvious thing to look out for is the management team’s expertise. What you want to see are people who have run operations in the fields that the SPAC is focusing on and managed the profit and loss of their companies.

What you want to see less of are the so-called deal-maker types. While the deal makers do bring some value, they may not be the guys on the ground level, getting their hands dirty to make the acquired assets work.

What you also want to see are investors who bring value to the table and not just come in at a discount for no logical reason. You also don’t want to see a management team that’s being paid too much.

Going back to the issue of SPAC-types, let’s just hope we see other industries making it to the market as well.

Conceptually, mining-type SPACs should be attractive. Malaysia was once a mining giant but today, we aren’t a significant player. While there are a few gold mines operating in Malaysia and a load of gold and possibly other valuable deposits yet to be discovered, there aren’t any new listings of mining stocks here.

Neither has any Malaysian company gone aggressively into buying mining assets abroad.

Hence, let’s see if Australaysia Resources and Minerals Bhd andTerraGali Resources Bhd get the nod to go to market.

(One is aware that the type of industry is merely one of the factors that the authorities look at when examining the suitability of a SPAC. The authorities also have an obligation to protect the interests of the investors, and so, there are a load of other issues that they look into when determining whether to approve a SPAC’s listing or not).

But SPACs are also not only about commodities. It would be interesting to see a telco SPAC, for example. A number of experienced telco guys could get together to scout around for telco licences in the region.

If they make it happen, then it would be a handsome payoff for early SPAC investors, especially if the operator hits the kind of cash flows Malaysian telcos are known to achieve.

Let’s hope the SPAC promoters do a good job in their proposals to the authorities to get their diversified SPACs listed.

● Senior news editor Risen Jayaseelan is still wondering what was the real reason the green-field plantation SPACs didn’t get to list.